Regulators clear way to rewrite annuity illustration rules

A National Association of Insurance Commissioners' committee voted Monday to reopen the annuity disclosure model to give regulators a chance to tamp down illustrations.

Regulators with the Life Insurance and Annuities Illustrations Working Group say that some sales illustrations project unrealistically high returns, which could leave consumers with inflated expectations about product performance.

The parent Life Insurance and Annuity Committee voted unanimously to allow the working Group to begin revising Model Regulation 245, which governs annuity disclosures.

Under Chairman Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce, the working group is weighing revisions addressing illustration length, disclosure requirements, accountability measures and how insurers present non-guaranteed crediting rates.

"The basic issue here is that there's some concerns regarding illustrated annuity returns that are unrealistically high," Slutsker said. "Whether consumers are coming away with reasonable expectations upon purchasing an annuity of how that annuity will actually perform."

As high as 27%

Regulators informally reviewed illustrations from 25 to 30 top annuity leaders. One-third showed maximum annual returns of 10% or lower. The remaining two-thirds illustrated returns above 10%: half of these fell between 11% and 15%, while the rest peaked between 16% and 27%.

Regulators also are concerned about newly developed indices that are "reverse engineered" to produce favorable historical results over the prior decade, Slutsker said, allowing insurers to illustrate elevated returns based on back-tested performance rather than actual market history.

The decision follows months of industry input. The working group conducted two public exposure periods that generated 19 comment letters from 14 interested parties, Slutsker said. One of the most common recommendations was to reopen Model 245 rather than attempt piecemeal changes.

Only 10 states have adopted the illustration provisions contained in Model 245, he said.

Regulators have reviewed illustration practices in states that have adopted the model and found that, in many -- though not all -- cases, illustrated crediting rates were lower than in states that have not adopted the regulation, Slutsker explained.

He said the current model has reduced some questionable illustration practices but has not eliminated them.

Among the remaining concerns are methods used to construct proprietary indices and the mathematical rules that determine credited interest, along with broader issues involving illustration transparency and disclosure.

The working group exposed a list of potential revisions submitted by interested parties and a 45-day comment period closes on Friday.

“We're really looking to receive feedback on each potential solution that has been brought up, in hopes of narrowing down ideas and eventually building consensus around a few,” Slutsker said.

What about RILAs?

Insurance Commissioner Doug Ommen, who chaired the meeting, asked whether regulators also plan to address registered index-linked annuities, or RILAs, which fall under federal securities regulation and currently are not covered by Model 245.

That question is expected to become one of the working group's next major priorities, Slutsker said.

"Model 245, as written, does not apply to those contracts," Slutsker said. "But we are seeing various issues. A lot of the ones that I mentioned also do apply to RILAs."

He said regulators will consider whether future enhancements should be extended to registered products and expects that issue to receive significant attention during upcoming meetings.

Many RILAs are reviewed through the Interstate Insurance Product Regulation Commission, commonly known as the Insurance Compact, making the current review an appropriate opportunity to consider broader updates, Ommen said.

Reopening the model formally begins the NAIC's drafting process, allowing regulators to develop amendments that would ultimately require approval by the association before states could consider adopting the revised standards.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.